The 1 Percenter: 'Japanification' of US Treasuries

There's a depressing article in Bloomberg in which some Japanese prognosticators believe that US Treasuries are headed to where (negative yield) Japanese government bonds (JGBs) already are. First will come sub-1% yields on the 10-year note. Then will come the coup de grace perhaps of negative interest rates. While this prospect is truly horrifying for what it means for the world economy, the Japanese should know a thing or two about a bond world turned upside down where you get less in return for lending out money:

Japan’s biggest bond bulls, seasoned by two decades of economic
stagnation, say the plunge in yields below zero in Tokyo foreshadows
record-breaking gains for U.S. Treasuries.

Mitsubishi UFJ Kokusai
Asset Management says U.S. 10-year yields will drop to 1 percent as soon
as this month. Sumitomo Mitsui Trust Asset Management says it’s likely
in 2017, and Mizuho Asset Management predicts the figure may go even
lower. The yield, a benchmark for everything from U.S. mortgages to
dollar bonds in developing nations, plunged to a never-before-seen 1.318
percent last week. A surging jobs report wasn’t enough to derail the
rally.

“Welcome to the world of Japanification,” said Hideo
Shimomura, the 49-year-old chief fund investor at Mitsubishi UFJ Kokusai
in Tokyo, which oversees about $119 billion. “One percent is
inevitable.”

His reason is driven by demographics:

Shimomura has 20 years of experience in bonds and has been bullish on
Treasuries since 2010, watching the 10-year yield tumble 2 1/2
percentage points as Japan’s slumped all to way to zero. He’s seen the
same trends in Japan play out in the U.S., with an aging population and
competition from low-cost manufacturers cooling inflation. Higher welfare costs
limit room for fiscal stimulus, encouraging monetary authorities to
pump money into the economy, where banks park the cash in bonds instead
of using it to make loans.

Japan has 26 percent of its population over the age of 65, compared with
15 percent in the U.S., based on World Bank estimates. U.S. baby boomers,
born when birth rates spiked for almost two decades after World War II,
began turning 65 in 2011, according to the U.S. census bureau. Those 65
and over will almost double in 2050 from 2012’s level, it estimates.

That said, there are reasons why this comparison may be superficial:

Unlike Japan's economy which has been in and out of recession, the US is growing at a steady (if unspectacular) 2-point-something-percent rate. Ditto for Q2 2016;

The US fertility rate is only slightly below the replacement rate at 1.9 births per woman, whereas Japan is already depopulating and has a fertility rate of 1.4;

Unlike Japan, the US is a country which has traditionally welcomed migrants in large numbers. If it has shortfalls in available workers or domestic demand, it can easily bring in more folks.

Although this isn't the cheeriest argument, I believe that the US economy's rather better economic performance and prospects relative to that of depopulation- and hence deflation-addled Japan (or Western Europe for that matter) merit higher rates of interest. The wildcard which this article doesn't talk about is the spillover effect of yield-hungry global fixed income investors driving US rates down further. But, strictly speaking, the the US economy in itself isn't in nearly as dire a share as its Japanese or Western European counterparts. Another would be a President Trump who would construct Fortress America complete with a great wall keeping all furriners, but that's another horror story for another day.